Ninth Circuit Rules on Insurer’s Duty to Settle Within Policy Limits

In Yan Fang Du v. Allstate Insurance Co., No. 10-56422, 2012 U.S. App. LEXIS 11755 (9th Cir. June 11, 2012), a panel of the U.S. Court of Appeals for the Ninth Circuit held that, under California law, an insurer has a duty to effectuate settlement where liability is reasonably clear, even in the absence of a settlement demand. However, there must be a reasonable opportunity to settle within policy limits.

The claimant, Yang Fang Du, filed suit for bad faith after having received an assignment of insured Joon Hak Kim’s rights against Allstate and its subsidiary, Deerbrook Insurance Co. (collectively, “Deerbrook”). The policy at issue had a limit of liability of $100,000 per person and an aggregate limit of $300,000 per accident. Du argued that Deerbrook did not attempt to reach a settlement of Du’s claim after Kim’s liability in excess of that policy limit became reasonably clear, resulting in a verdict against Kim in the amount of $4,126,714.46.

In ruling on the propriety of the district court’s rejection of Du’s proposed jury instructions, the Ninth Circuit concluded that an insurer has a duty to effectuate settlement when liability is reasonably clear, even in the absence of a settlement demand. The court held, however, that there must be “a reasonable opportunity to settle within those limits.” In this case, prior to litigation, Du’s counsel had made an early demand of $300,000 to settle all four injured parties’ claims, but did not provide any of the documents that would reasonably be necessary to evaluate that demand. The Ninth Circuit held that Deerbrook could not settle within limits in those early stages because Deerbrook lacked corroborating proof of the extent of Du’s injuries and medical expenses. Deerbrook also had no proof of the injuries of the other three individuals who were injured in the incident. After the documentary evidence was provided respecting Du’s claim, Deerbrook offered the $100,000 individual limit to Du, which was rejected as “too little, too late.” In finding for Deerbrook, the Ninth Circuit held that there was no evidence that Deerbrook should or could have made an earlier settlement offer to Du.

The Ninth Circuit’s ruling in this case is not binding on California courts, which have made several statements in the past reflecting that a settlement demand within policy limits is a requirement for bad faith exposure. See Coe v. State Farm Mutual Automobile Ins. Co., 66 Cal.App.3d 981 (1977) (“actionable ‘bad faith’ arises not from an insurance carrier’s obligation ‘to settle,’ but from unwarranted failure to accept a reasonable settlement offer”); Merritt v. Reserve Ins. Co., 34 Cal.App.3d 858 (1973) (a conflict of interest “only develops when an offer to settle an excess claim is made within policy limits”). In its ruling, the Ninth Circuit distinguishes these prior statements of law as “dicta.” Whether California courts ultimately agree with the Ninth Circuit on this issue is uncertain at best.

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